Analysis | Critical Connections

Why Did China Refuse To Bail Out Pakistan?

Pakistan faces a financial crisis. Its foreign currency reserves have plummeted over the course of last year due to the negative balance of trade and debt repayments, leaving two options for a bailout: ask the International Monetary Fund (IMF) or ask friendly countries. Pakistan opted for the latter option and secured a bailout package from Saudi Arabia, but surprisingly, it has yet to secure a similar package from China.

In order to secure a bailout, Pakistan’s prime minister Imran Khan traveled to Saudi Arabia twice. Pakistan succeeded in getting a $6 billion bailout package from Saudi Arabia but still needed $9 billion to fully avert the financial crisis. Therefore, Khan embarked on his first ever visit across the Karakoram Mountains to Beijing.

Khan expected a decent bailout package from China, which is often called Pakistan’s all-weather friend. Pakistan is home to the China-Pakistan Economic Corridor (CPEC), the $62 billion flagship project of the Belt and Road Initiative. Pakistan hoped to capitalize on the significance of CPEC to secure a bailout package, but the joint statement released by Pakistan and China avoided any mention of an immediate bailout. China likely wants more detailed negotiations, and meanwhile, Pakistan’s financial crisis continues.

Five reasons help explain China’s surprising response.

First, China is not happy after Pakistan made Saudi Arabia the third partner in CPEC. China did not like this move and compelled Pakistan to backtrack on this offer, but the damage was already done. CPEC is a Chinese project—envisioned and financed by China. It’s natural that China would oppose the entry of a third partner in the project to protect its own interests.

Later, Pakistan invited Saudi Arabia to develop a major oil refinery in Gwadar, the CPEC capital of Pakistan, and take control of gold mine projects in Balochistan. This offer again clashed with Chinese interests in the region as China perceives Saudi Arabia as a U.S. proxy and will not tolerate its presence in Balochistan near Chinese funded megaprojects.

Second, Pakistan’s new government criticized CPEC. During the administration of Khan’s predecessor, Nawaz Sharif, CPEC acquired the status of a larger-than-life economic project. Considered a game changer, Pakistan’s government strongly defended the project. However, ministers in Khan’s cabinet openly characterized CPEC as being unfair to Pakistan and even suggested placing all CPEC projects on hold for one year to review if they are in Pakistan’s interest or not. From China’s standpoint, this was tantamount to reversing billions of dollars’ worth of Chinese investments in Pakistan. Therefore, China ensured that the joint statement categorically stated that there will be no changes in CPEC.

Third, Pakistan’s turbulent internal situation reduced its bargaining power. While Khan was in China asking for a bailout package, a religious fundamentalist group held many of Pakistan’s urban centers hostage. The group was protesting the acquittal of a Christian woman in a blasphemy case. For three days, protests disrupted business. China wants stability in Pakistan so that CPEC projects can develop and China can use the corridor for economic activity. To pressure Pakistan to get its house in order and deal strictly with religious fundamentalists, China did not bail out Pakistan.

Fourth, China wanted to deliver a crucial message: it will not be blackmailed. China wanted to signal that Pakistan is dependent on China, and the terms of this arrangement are decided by China, not Pakistan. Beijing wanted to send the message that Pakistan might receive a bailout package if it does not demand changes in CPEC. China masterfully delivered this message, and this is evident from the language of the joint statement. Not only did Pakistan agree to no changes in CPEC, but it also did not publicly object to the lack of a bailout.

Finally, China wants Pakistan to cooperate more in the arena of defense. The joint statement announced that both countries will cooperate on “the three evil forces of extremism, terrorism, and separatism.” This means that China wants Pakistan to not only curb religious militancy within its borders, but also help contain Uighur separatism in Xinjiang province. By refusing the bailout package and delaying it in the near future, China has pushed Pakistan to protect Chinese interests in the avenue of defense.

After China’s refusal, Pakistan has no choice but to exercise the IMF bailout option. Pakistan’s negotiations are currently underway with the IMF. If Pakistan secures an IMF bailout, then the country will likely have to reveal details of its CPEC agreements, something which it has been reluctant to do since the inception of CPEC and which will open another Pandora’s box. This situation has left Khan’s government in a predicament, and the crisis continues.

Adnan Aamir is a journalist and researcher based in Pakistan. He can be reached at Adnan.Aamir@Live.com. Follow him on Twitter at @iAdnanAamir.